Q2 Outlook: Commodities power ahead
Head of Commodity Strategy
Summary: Commodities have cast off the caution that defined the start of this year and powered to strong collective gains, led by energy and industrial metals. As we enter the second quarter the mood is still good, with crude oil riding atop a wave of price-supportive supply news, gold encouraged by a dovish Fed and copper pinning its hopes on a US-China trade détente.
Markets, including commodities, began the year on the defensive with growth concerns and US Federal Reserve-led liquidity tightening raising concerns about the prospects for 2019.
Crude oil’s near-40% rally from the December low has resulted in both WTI and Brent clawing back half the losses seen between October and December. With global demand growth holding up despite the prospect for lower global growth, the market has instead been left to focus on a near-perfect storm of price-supportive supply news.
Aggressive production cuts (both voluntary and involuntary) from the Opec+ group of producers have seen supply from these countries drop by more than was expected. Saudi Arabia was probably angered by the price collapse following the surprise US decision to grant waivers to buyers of Iranian oil and has been cutting production aggressively since then. In addition to these cuts, which hinge on continued cooperation between Russia and Saudi Arabia, the involuntary cuts from Venezuela and Iran (down 1.6 million barrels/day during the past year) have added an additional layer of support.
The six-month waiver that the US granted to buyers of Iranian oil back in November is due to expire in early May and this has raised some questions about what will happen next. But with Opec+ continuing to cut production and the US forcing down exports from Iran and Venezuela, only a major change in the outlook for demand will alter the current positive sentiment.
Several Opec producers, and Saudi Arabia in particular, need oil back above $80/barrel to meet their fiscal obligations and they are unlikely to be satisfied with Brent at $70/b. On that basis, we expect supply to be kept tight over the coming months, thereby supporting a potential extension towards $75/b before it eventually runs out of steam amid renewed concerns about the negative impact to global growth.
We should always keep in mind that many investors buy gold to hold an insurance policy against adverse movements across other investments such as stocks. On that basis, it is worth keeping a close eye on flows in and out of the exchange-traded products often used by long-term investors. So long as stocks continue to show their current resilience, gold is unlikely to mount a strong enough challenge at the massive area of resistance between $1,360/oz and $1,380/oz.
High-grade copper has managed to reclaim half of what was lost in the aftermath of the US-China trade war breaking out last year. The combination of an eventual de-escalation of the trade conflict and the Chinese policy easing already in place, combined with a relatively tight supply outlook, should continue to provide the support copper needs to yield a positive return in 2019. However, having already returned to our H2’19 target of $3/lb we see the upside as limited into the second quarter. On that basis we are looking for a potential $2.8/lb to $3.05/lb trading range to emerge.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.